Financial Samurai

I want to get everybody talking about their retirement portfolios because making the proper net worth allocation, deciding on how often to rebalance, and running different growth scenarios matters more over time. Contributing the maximum $17,500 a year to your 401(k) should be standard. If you’re making more than $60,000 a year and not maxing out your 401(k), then you should probably give yourself a timeout to contemplate why you’re slicing off your toes.

As you can tell from my 401(k) by age chart, contributions add up quickly over time. Assuming you receive no company match and suffer no losses, you’ll have at least $100,000 in your 401(k) in six years. In 10 years, you’ll probably sock away over $200,000 and in 30 years you’ll finally reach that magical $1 million dollar mark.

The S&P 500 is up roughly 10% year to date. That’s a healthy $100,000 gain in your million dollar portfolio in three months without having to do much of anything. I’m cautious investing new money now, but the point is once you’ve amassed a sizable nut there’s no longer a need to work in a bull market - unless you are restless like me.

401k CONTRIBUTIONS AS A PERCENTAGE OF YOUR PORTFOLIO Read more…

There’s only one thing worse than buying a stock that’s going down that continues to go down after purchase and that’s buying a stock that’s going up that ends up going down soon after purchase! A lot of retail investors are wondering whether NOW is the time to jump back in with major US indices at record highs.

Between the recovery years of 2010-2012 there was a net cash outflow of $360 billion dollars in US Stock Funds according to Investment Company Institute. Year to date there has been roughly $41 billion in net cash inflows. It’s the classic “day late and a dollar short” herd mentality that we see over and over again.

I’m personally very hesitant about chasing the markets here and have taken some profits in my 401k. That said, I also hate missing out on a potential “too the moon” scenario where stocks continue to percolate higher. Stocks generally always overshoot on the upside and downside thanks to greed and fear.

So what is a late and greedy investor supposed to do in this environment? Hedge of course!

A WAY TO LIMIT RISK WHILE BUYING STOCKS AT RECORD HIGHS Read more…

There are two things investors need to battle on a constant basis. The first thing is fear. We must eradicate fear when markets are collapsing because we know great fear is when fortunes are made. I distinctly remember when the S&P 500 closed at its low of 666 on March 6, 2009. The mark of the devil was such an insult to injury on Wall Street that hardly anybody decided to buy that day.

Fear can be overcome through experience as we’ve seen a rebound in plenty of asset classes time and time again. We’re seeing a tremendous recovery in housing right now for example. Having a cash hoard so great that you can withstand any amount of body blows is also a key element of combating fear. But feeling secure is not the way to make money. You’ve got to actually get over your fear of losing your security by deploying funds that will initially lose money since nobody can time the bottom.

Greed is the other element an investor must overcome. The desire to make an ever increasing amount of money has ruined people’s lives. Back in the dotcom bubble of 1999-2000, I had several friends who were paper millionaires and unwilling to sell their dotcom company shares out of belief prices would only go higher. Not only did their company shares tank, they ended up owing taxes on the value when their options were exercised. Let’s say you exercise $1 million worth of options at $100 a share. You decide not to sell and the stock detonates to $10 a share. You still owe about $500,000 in taxes on the $1 million even though your shares are only worth $100,000! Another win for government.

Let me tell you another story about greed. The owner of a deli I went to for 11 years in downtown San Francisco was a jovial fella who used to make the best banana nut muffins. He margined up his $50,000 in capital to $200,000 online. One morning after the collapse he revealed to me over coffee that his portfolio was valued at $800,000 at the peak. $800,000 was enough to move back to his home country of Iran and live like a Shah for the rest of his life. Instead of selling everything to fulfill his dreams at the age of 32, he hung on and lost over $150,000 from his initial $50,000 investment due to margin. That’s a $950,000 swing. I stopped in last month to pay a visit. 13 years after the dotcom collapse he’s still making breakfast burritos and banana nut muffins for whiny customers at the age of 45.

TWO SIDES TO EVERY ACTION Read more…

When the stock markets were imploding, so was my 401k by a magnitude of about -30%. My net worth probably took an equal percentage hit because of my holdings in real estate. Good thing it’s hard to mark to market real estate values given the lack of transactions. To make myself feel better, I often joked I was catching up to the likes of Bill Gates, Warren Buffet, and Carlos Slim given they lost billions.

Traffic in San Francisco was lighter back then. I could get a reservation on a whim at my favorite steak house and I no longer had to hear every Dick, Nancy, Lisa, and Raj tell me how much money they were making in the markets. 2008-2010 was a time for reflection. There was a reprieve from cacophony that felt wonderful.

Now that we’ve recovered and then some, I’m afraid the noise will return again.

YOU DON’T WANT A BULL MARKET Read more…

Multiply by 667 to get to $1 million and then light on fire.

The following is a guest post by insightful reader JayCeezy. He is a veteran investor who shares his perspective on investing, retirement, and risk tolerance. With the sequester now in effect, it will be interesting to see how the economy and stock markets perform with an anchor on its back.

How To Lose A Million Dollars.

Kidding. It was a lot more. Fortunately, I’m over it and have moved on. Hardly ever think about it. No, sir.

I love the subject of Personal Finance, and enjoy books, podcasts, newsletters, and especially Yakezie network blogs. There is a future-based element of fantasy to the subject, reaching the financial independence to allow us to say and do what we want, instead of what we have to. And now and then, I need a break from PF blogs where everybody is smart, a critical thinker, successful, resilient, goal-oriented, a winning investor, and great-looking.

You, dear reader, are all of those things, or you wouldn’t be reading Financial Samurai. So, let’s change it up for a few minutes; sit back and vicariously experience a few stories about how someone (ok, me) metaphorically burned the roof of my mouth on a hot slice of PF pizza. Make sure you keep a cold mug of Schadenfreude nearby. Read more…

Everybody has a different need for borrowing money. Some might want to  get a new $5,000 home theatre system (!!!), while some might need a $10,000 loan to prevent their small business from going under. It’s important to understand that if you are a borrower in P2P lending, you must present yourself in the best light possible.

Treat your P2P lending borrower’s profile as if you were about to interview for a job. Your resume needs to exemplify your strengths while deemphasizing your weaknesses. The average employer spends just seven seconds on a resume before making a decision whether to go forward with an interview or boot you to the curb. The same cursory amount of time is spent by a lender, especially one that is investing in over one hundred notes for diversification purposes!

EXAMPLE OF A POORLY RATED P2P BORROWER Read more…

Jump in. The water is freezing.

Let’s say someone offers you $100,000 to cross a busy highway blindfolded. Would you do it? Probably not, unless you knew for sure a loan shark would break all your ribs and cut off your pinkies if the money you borrowed was not returned by 9pm that evening. You now have to weigh between potentially getting hit by a truck and dying, or the certainty of feeling intense pain during a long stay in the hospital. Once you’re healed, the loan shark will be waiting for you since you’ll still owe $100,000!

We do not know what we do not know. Therefore, it’s important to run through different scenarios when it comes to investing and planning for your retirement. I put my 401k through three different scenarios of Base Case, Realistic Case, and Blue Sky Case to see whether there will be enough for me to live on by the time I’m in my 60s. Everybody should do the same because it’s better to end up with too much than too little. The reality is that I’ve mentally written off my 401k completely so I can stay hungry and build further income streams.

Now that the stock markets are at 5-year highs, I’ve received a lot of feedback that we should all be heavily invested in stocks. It’s terrific how short our memories are when it comes to investing. Take a look at the commentary from my recommended net worth allocation post and see for yourself. It’s as if 2009 never happened. The best is when someone who only started investing after the crash, or who hardly had any money during the crash tells me he’s so bullish on the markets. The enthusiasm gives me hope that we will repeat the same mistakes over and over again. Only through enough pain do we change our ways.

EVERYBODY IS A GENIUS WHEN THE MARKETS ARE GOING UP Read more…